The increase in foreclosure and short sales in recent years has sparked some new legislation which expands California’s anti-deficiency laws. California’s present and impending anti-deficiency statutes, all contained in the Code of Civil Procedure, are summarized below.
Section 580b exempts purchase money notes secured by a deed of trust or mortgage on a dwelling for not more than four families occupied by the borrower. This section exempts all purchase money notes secured by a deed of trust on your primary residence, whether they are secured by senior or junior deeds of trust. These loans are non-recourse — the lender can only rely on the proceeds from the sale of the property to satisfy the note and cannot pursue the borrower for any deficiency. However, loans made to refinance the property after the sale are non-purchase money and are not presently exempt under Section 580b. One other type of note is non-recourse under section 580b, i.e., a note given to the seller of any real property secured by a deed of trust or mortgage to secure the balance of the purchase price.
Section 580d applies not to the character of the loan but to the remedy invoked by the lender to foreclose. It applies to all notes secured by a deed of trust. If the lender chooses to foreclose non-judicially through the power of sale in the deed of trust and the property is ultimately sold at a non-judicial foreclosure sale, that lender is precluded from pursuing the borrower for any deficiency. If a lender wishes to pursue the borrower for a deficiency, the lender must elect judicial foreclosure.
In foreclosure and short sales an issue arises when there is a non-purchase money sold-out junior lien holder. A non-purchase money sold-out junior lien holder can pursue the borrower on the underlying note because the senior lien holder’s foreclosure sale has made the junior an unsecured creditor. There is some possible protection in a short sale. Section 580e precludes any deficiency judgment where a lender holding a loan secured by a deed of trust on a dwelling of not more than four units gives written consent to a short sale, provided the borrower is not a corporation, limited liability company, or limited partnership.
Effective January 1, 2013, Section 580b is amended to add provisions that, with respect to the refinance of a purchase money loan on or after January 1, 2013, partially protect homeowners who default on their refinance loan. Homeowners will be protected from personal liability for any deficiency used to refinance the purchase money loan, including any loan fees, costs, and related expenses for the refinance. This new anti-deficiency protection, however, does not extend to any “cash out", i.e., any new principal not applied to the pre-existing obligation on the prior purchase money loan. The new Section 580b, effective January 1, 2013, is here.
Summary: Purchase money loans on your principal residence are exempt from any deficiency, as are loans made by the seller of any real property to secure the balance of the purchase price. Non-judicially foreclosed loans on any real property are exempt. Non-purchase money sold-out junior lien holders may generally pursue the borrower for a deficiency. Lien holders, including juniors, who give written consent to the short sale of your dwelling may not pursue a deficiency. Refinance loans of purchase money loans on your residence, made after January 1, 2013, are exempt from a deficiency in the amount actually expended to refinance the purchase money loan, not to any “cash out".
UPDATE: July 2013 legislation has amended sections 580b and 580d. The amendment is not intended to change existing law but to clarify it. See my post entitled: Antideficiency Protections Under 580b, 580d, and 580e Amended and Clarified.